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StanCorp Financial Group, Inc. Reports Fourth Quarter and Full Year 2014 EarningsStanCorp Financial Group, Inc. (NYSE: SFG) today reported net income of $56.2 million, or $1.32 per diluted share for the fourth quarter of 2014, compared to $65.0 million, or $1.46 per diluted share for the fourth quarter of 2013. After-tax net capital losses were $4.4 million for the fourth quarter of 2014, compared to $1.3 million for the fourth quarter of 2013. Net income excluding after-tax net capital losses was $1.42 per diluted share for the fourth quarter of 2014, compared to $1.49 per diluted share for the fourth quarter of 2013 (see discussion of non-GAAP financial measures below). The decrease in net income per share was primarily due to lower premiums and lower net investment income, partially offset by lower diluted weighted-average shares outstanding and a lower effective tax rate for the fourth quarter of 2014. "We are pleased with our fourth quarter and full year 2014 results given the economic headwinds that have impacted our industry," said Greg Ness, chairman, president and chief executive officer. "As we look into 2015, we expect continued good performance from our businesses, despite ongoing challenges for the industry as a result of a lower interest rate environment." 2014 Results Net income was $219.3 million, or $5.05 per diluted share for 2014, compared to $228.5 million, or $5.13 per diluted share for 2013. After-tax net capital losses were $8.8 million for 2014, compared to $9.4 million for 2013. Net income excluding after-tax net capital losses was $5.25 per diluted share for 2014, compared to $5.34 per diluted share for 2013. The decrease was primarily due to lower operating expenses for 2013, which included savings of $20.6 million or $0.30 per diluted share due to an amendment of the Company's postretirement medical plan, which did not recur for 2014. The Company reported net income return on average equity, excluding after-tax net capital losses from net income and accumulated other comprehensive income ("AOCI") from equity, of 11.2% for 2014, compared to 12.3% for 2013. 2015 Guidance For 2015 the Company expects net income per diluted share, excluding after-tax net capital gains and losses, and net income return on average equity, excluding after-tax net capital gains and losses from net income and AOCI from equity, to be in line with 2014. This guidance includes the following expectations:
Actual results may vary due to changes in the interest rate environment and other factors described in Forward-Looking Information below. Business Segments Insurance Services Employee Benefits Employee Benefits reported income before income taxes of $53.6 million for the fourth quarter of 2014, compared to $67.2 million for the fourth quarter of 2013. The decrease was primarily due to lower premiums and lower net investment income. Employee Benefits reported income before income taxes of $201.8 million for 2014, compared to $216.4 million for 2013. The decrease was primarily due to lower premiums and lower net investment income, partially offset by favorable claims experience. Employee Benefits premiums decreased 3.5% from $479.0 million for the fourth quarter of 2013 to $462.2 million for the fourth quarter of 2014. Employee Benefits premiums decreased from $1.93 billion for 2013 to $1.84 billion for 2014. The decrease for the fourth quarter and full year 2014 was primarily due to lower Employee Benefits sales in the first half of 2014 compared to prior periods. Employee Benefits annualized new sales were $79.3 million for the fourth quarter of 2014, compared to $69.6 million for the fourth quarter of 2013 and $215.6 million for 2014, compared to $222.1 million for 2013. The increase in sales for the fourth quarter of 2014 reflected an increase in proposal activity. The benefit ratio for Employee Benefits, measured as benefits to policyholders and interest credited as a percentage of premiums, was 77.4% for the fourth quarter of 2014, compared to a more favorable benefit ratio of 76.1% for the fourth quarter of 2013. The benefit ratio can fluctuate widely from quarter to quarter and tends to be more stable when measured on an annual basis. The annual benefit ratio for Employee Benefits, measured as benefits to policyholders and interest credited as a percentage of premiums, was 77.8% for 2014, compared to 78.9% for 2013. The discount rate used for newly established long term disability claim reserves was 4.00% for the fourth quarter of 2014, compared to 3.75% for the fourth quarter of 2013. A 25 basis point increase or decrease in the discount rate currently results in a corresponding increase or decrease in quarterly pre-tax income of approximately $2 million. The Company's new money investment rate was 4.56% for the fourth quarter of 2014, compared to 4.33% for the fourth quarter of 2013. The 12-month reserve interest margin between the Company's new money rate and average reserve discount rate was 55 basis points for the fourth quarter of 2014, compared to 49 basis points for the fourth quarter of 2013. Individual Disability Individual Disability reported income before income taxes of $15.4 million for the fourth quarter of 2014, compared to $16.7 million for the fourth quarter of 2013 and income before income taxes of $52.9 million for 2014, compared to $56.0 million for 2013. Individual Disability premiums were $51.8 million for the fourth quarter of 2014, compared to $48.5 million for the fourth quarter of 2013 and premiums were $199.1 million for 2014, compared to $190.5 million for 2013. The benefit ratio for Individual Disability was 60.0% for the fourth quarter of 2014, compared to 57.5% for the fourth quarter of 2013 and was 65.3% for 2014, compared to 63.9% for 2013. Due to the relatively small size of the Individual Disability business, the benefit ratio generally fluctuates more on a quarterly basis and tends to be more stable when measured on an annual basis. Asset Management Asset Management reported income before income taxes of $18.7 million for the fourth quarter of 2014, compared to $19.5 million for the fourth quarter of 2013. The net impact to income before income taxes from hedging activities related to the Company's equity-indexed annuity product was a decrease of $0.7 million for the fourth quarter of 2014 and an increase of $0.8 million for the fourth quarter of 2013. Asset Management reported income before income taxes of $77.9 million for 2014, compared to $79.3 million for 2013. Assets under administration, which include assets related to retirement plans, individual fixed annuities, private client wealth management and commercial mortgage loans managed for third-party investors, increased 7.4% to $26.53 billion at December 31, 2014 from $24.70 billion at December 31, 2013, primarily reflecting higher equity values and positive cash flows for retirement plan assets under administration. Commercial mortgage loan originations were $256.8 million for the fourth quarter of 2014, compared to $251.2 million for the fourth quarter of 2013. Commercial mortgage loan originations were $1.18 billion for 2014, compared to $1.30 billion for 2013, the decrease reflected increased competition in the commercial mortgage origination market. Other The Other category includes the return on capital not allocated to the product segments, holding company expenses, operations of certain unallocated subsidiaries, interest on debt, unallocated expenses, net capital gains and losses primarily related to the disposition or impairment of the Company's invested assets and adjustments made in consolidation. The Other category reported a loss before income taxes of $14.4 million for the fourth quarter of 2014, compared to $11.0 million for the fourth quarter of 2013. Net capital losses were $7.2 million for the fourth quarter of 2014, compared to $2.8 million for the fourth quarter of 2013. The loss before income taxes excluding net capital losses was $7.2 million for the fourth quarter of 2014, compared to $8.2 million for the fourth quarter of 2013, reflecting lower interest expense as a result of debt repurchased earlier in the year. The Other category reported a loss before income taxes of $45.7 million for 2014, compared to $38.7 million for 2013. Net capital losses were $14.0 million for 2014, compared to $15.7 million for 2013. The loss before income taxes excluding net capital losses was $31.7 million for 2014, compared to $23.0 million for 2013. The increase in loss before income taxes excluding net capital losses was primarily due to the amendment of the Company's postretirement medical plan that resulted in a $20.6 million decrease in operating expenses for the first half of 2013, which did not recur for 2014. Cash and Investments At December 31, 2014, the Company's total cash and investments consisted of 56.8% fixed maturity securities, 38.8% commercial mortgage loans, 2.6% other invested assets and real estate, and 1.8% cash and cash equivalents. The overall weighted-average credit rating of the fixed maturity securities portfolio was A- (Standard & Poor's) at December 31, 2014. At December 31, 2014, commercial mortgage loans in the Company's investment portfolio totaled $5.32 billion on approximately 6,500 commercial mortgage loans. The average loan balance retained by the Company in the portfolio was $0.8 million. Commercial mortgage loans more than 60 days delinquent were 0.16% of the portfolio balance at December 31, 2014, compared to 0.28% at December 31, 2013. Book Value The Company's book value per share increased 5.8% from $48.79 at December 31, 2013, to $51.61 at December 31, 2014. AOCI decreased $20.4 million from $134.7 million at December 31, 2013 to $114.3 million at December 31, 2014, primarily due to adjustments recorded for the Company's retirement plans, partially offset by an increase in net unrealized capital gains in the Company's fixed maturity securities portfolio related to lower market interest rates. The Company's book value per share excluding AOCI increased 6.9% from $45.73 at December 31, 2013, to $48.90 at December 31, 2014 (see discussion of non-GAAP financial measures below). Capital Management The Company deployed $248.8 million of capital through its annual cash dividend to shareholders and the repurchase of shares and debt for 2014. Share Repurchases For the fourth quarter of 2014, the Company repurchased 446,199 shares at a total cost of $27.9 million, which reflects a volume weighted-average price per share of $62.52. For 2014, the Company repurchased 2,383,175 shares at a total cost of $147.0 million, which reflects a volume weighted-average price per share of $61.67. At December 31, 2014, the Company had 2.0 million shares remaining under its share repurchase authorization. Diluted weighted-average shares outstanding were 42,563,312 for the fourth quarter of 2014, compared to 44,493,139 for the fourth quarter of 2013. Shareholder Dividend In the fourth quarter of 2014, the Company paid an annual dividend to shareholders of $1.30 per share for a total distribution of $54.7 million. The dividend per share was an 18.2% increase over the 2013 dividend of $1.10 per share. This represents the fifteenth consecutive annual increase to the shareholder dividend. Debt Repurchase In the first quarter of 2014, the Company repurchased $47.1 million of its 6.90% junior subordinated debentures ("Subordinated Debt"), which matures on June 1, 2067 and is non-callable prior to June 1, 2017. The Company had $252.9 million of Subordinated Debt outstanding at December 31, 2014. Available Capital The Company's available capital was approximately $530 million and $515 million at December 31, 2014 and September 30, 2014, respectively. The income from its statutory insurance subsidiaries and adjustments to statutory reserves in the fourth quarter of 2014 were partially offset by share repurchases and an allocation for expected annual interest and shareholder dividends. Available capital includes capital at its statutory insurance subsidiaries in excess of the Company's target risk-based capital ("RBC") ratio of 300% and cash and capital at the holding company and non-insurance subsidiaries. The RBC ratio was approximately 445% at December 31, 2014. Accounting Pronouncements In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. This ASU permits entities to account for qualified affordable housing projects under the proportional amortization method ("PAM") of accounting. Under PAM, the cost of the investments is amortized in each period in proportion to the tax credits and benefits of tax losses received in that period and allows the amortization of the investments and the tax benefits to be recognized in income taxes on the consolidated statements of income. The Company expects to adopt this ASU effective January 1, 2015 resulting in a decrease in the beginning balance of 2015 retained earnings between $15 million and $20 million. Based on currently held investments at December 31, 2014, the Company estimates the adoption of the ASU will result in a decrease in net income per diluted share of approximately $0.30 for 2015. The adoption of this ASU will change the timing of the benefit realized in net income but will not change the cumulative total benefit to net income over the life of the investments. Non-GAAP Financial Measures Financial measures that exclude after-tax net capital gains and losses and AOCI are non-GAAP (Generally Accepted Accounting Principles in the United States) measures. To provide investors with a broader understanding of earnings, the Company provides net income per diluted share excluding after-tax net capital gains and losses, along with the GAAP measure of net income per diluted share, because capital gains and losses are not likely to occur in a stable pattern. Net income return on average equity excluding after-tax net capital gains and losses from net income and AOCI from equity is furnished along with the GAAP measure of net income return on average equity because management believes providing both measures gives investors a broader understanding of net income return on average equity. Measuring net income return on average equity without AOCI excludes the effect of market value fluctuations of the Company's fixed maturity securities associated with changes in interest rates and other market data. Management believes that measuring net income return on average equity without AOCI is important to investors because the turnover of the Company's portfolio of fixed maturity securities may not be such that unrealized gains and losses reflected in AOCI are ultimately realized. Furthermore, management believes exclusion of AOCI provides investors with a better measure of return. About StanCorp Financial Group, Inc. StanCorp Financial Group, Inc., through its subsidiaries marketed as The Standard - Standard Insurance Company, The Standard Life Insurance Company of New York, Standard Retirement Services, StanCorp Mortgage Investors, StanCorp Investment Advisers, StanCorp Real Estate and StanCorp Equities - is a leading provider of financial products and services. StanCorp's subsidiaries offer group and individual disability insurance, group life and accidental death and dismemberment insurance, group dental and group vision insurance, absence management services, retirement plans products and services, individual annuities, origination and servicing of fixed-rate commercial mortgage loans, and investment advice. For more information about StanCorp Financial Group, Inc., visit its investor relations website at www.stancorpfinancial.com. Conference Call StanCorp management will hold an investor and analyst conference call on January 30, 2015, at noon Eastern time (9:00 a.m. Pacific time) to review StanCorp's fourth quarter and full year 2014 results. To listen to the live webcast of this conference call, visit www.stancorpfinancial.com. Windows Media PlayerTM will be required to listen to the webcast. A webcast replay will be available starting approximately two hours after the original broadcast. The replay will be available through March 20, 2015. A telephone replay of the conference call will also be available approximately two hours after the conference call by dialing (877) 660-6853 or (201) 612-7415 and entering the conference identification number 13597119. The telephone replay will be available through February 9, 2015. Forward-Looking Information Some of the statements contained in this earnings release, including estimates, projections, expected operating results, statements related to business plans, strategies, objectives, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. Forward-looking statements also include, without limitation, any statement that includes words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "seeks," "will be," "will continue," "will likely result" and similar expressions that are predictive in nature or that depend on or refer to future events or conditions. The Company's forward-looking statements are not guarantees of future performance and involve uncertainties that are difficult to predict. They involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed in reports filed by StanCorp with the Securities and Exchange Commission, including Forms 10-Q and 10-K. As a provider of financial products and services, the Company's actual results of operations may vary significantly in response to economic trends, interest rates, investment performance, claims experience, operating expenses and pricing. Given these uncertainties or circumstances, investors are cautioned not to place undue reliance on forward-looking statements as a predictor of future results. The Company assumes no obligation to publicly update or revise any forward-looking statements including annual guidance, whether as a result of new information, future events or otherwise. The following factors could cause the Company's results to differ materially from management expectations suggested by forward-looking statements:
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